Cybersecurity report: Big Tech most likely to swallow up emerging firms
August 3, 2018 | Blog

Cybersecurity report: Big Tech most likely to swallow up emerging firms

This blog is an excerpt from our report titled “Exit Scenarios For Cybersecurity Growth Firms: Why Investors are More Likely to See Acquisitions than IPOs.” For more information, please log in to your SharesPost account or register here

Cybersecurity firms Zscaler and Carbon Black have enjoyed strong IPOs this year. But don’t expect the many emerging venture and private equity-backed startups to follow suit.

In part two of our series of reports on cybersecurity, we explain why we think corporations with major cybersecurity divisions will purchase these startups before they can go public.

Cisco, Microsoft, and Raytheon have been acquiring several cyber-startups in recent years, using their considerable cash to buy into every area of cyber-innovation. Symnatec, the most capable public pure-play company we tracked, has been particularly aggressive with M&A.

These top divisions, whose revenues exceed many of the leading pure play companies, enjoy a significant advantage over competitors. They can incorporate their own cybersecurity frameworks into the parent company’s existing products.

For investors, a M&A exit is probably ideal, given the mixed record of stand-alone companies trading on the public markets thus far. We looked at the performance of 8 cybersecurity IPOs 90 days after going public. About half of the companies suffered significant declines in value while the other half saw big increases.

In addition, our analysis of 10 publicly-traded firms indicates that every company that generated significant year over year growth in earnings before interest, taxes, depreciation, and amortization also showed significant EBITDA declines at some later point.

Here are four other major takeaways from the report:

Mega deals drive cyber financing Private investment in cybersecurity has rapidly grown over the past few years, reaching a record $10 billion in 2017. Cybersecurity “mega deals,” $100 million or greater, has jumped to 58 percent of all private deals last year from 25 percent in 2015. In other words, the growth in dollars invested has outpaced the number of deals over each of the past few years.

Private equity competes with venture capital for cyber deals Since 2015, 7 out of 18 private rounds over $100 million came from other PE firms providing expansion capital to companies that may not fit the traditional start-up model. PE investors have also used leveraged buyouts (LBOs) and other control transactions. PE investments are increasingly driving dollar growth in cybersecurity because such investors typically seek greater stakes in portfolio companies than VCs and are willing to use debt to acquire positions in relatively mature companies.

Cyber IPOs scarce as Big Tech snatches up companies Given the high level of uncertainty with cybersecurity IPOs, many companies might opt for more predictable M&A deals. We believe one-stop cybersecurity vendors, incumbents looking to fill gaps in products and expertise, will be the most likely buyers. For example, by acquiring Lookout, Symantec could strengthen its capabilities in application security, risk and compliance, identity access management, and threat intelligence.

Ten emerging companies to watch Companies like Tanium, CloudFare, and Duo Security are among a select group of private firms that have outmaneuvered the competition in an increasingly complicated environment. These companies are generally less developed and thus more prone to failure. However, thanks to strong performances to date and innovative approaches to less developed areas of cybersecurity, we believe they offer better growth prospects over more mature competitors.

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Thomas Lee

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.